Heads of Agreement Template in Australia: What to Include and Which Parts Bind

A heads of agreement, also called a term sheet or memorandum of understanding, is a short document that writes down the main terms of a deal before the full contract is drawn up. It records who the parties are, what is being bought, sold or agreed, the price, the conditions and the timetable. Whether any of it is legally binding depends on the circumstances, in particular what the parties objectively intended, so a well-drafted one says plainly which parts bind and which do not.

Claim Done drafts a heads of agreement or term sheet from your answers for a flat A$49. You answer plain questions about the deal, and you get a document that sets out the commercial terms, marks the binding parts clearly and sets a date when the terms lapse.

What a heads of agreement is for

Many deals do not go straight from a handshake to a full contract. In between, the parties need to check they actually agree on the big points. A heads of agreement is that checkpoint.

The Victorian Government Solicitor’s Office, writing about leases, says a heads of agreement generally sets out the key commercial terms of the proposed transaction. It is used during negotiation, so the parties can formally recognise the key terms already agreed while the detail of the formal document is still being worked out.

People use one when they are:

• buying or selling a business or its assets
• buying or selling shares
• setting up a joint venture or strategic partnership
• taking in an investor or raising capital
• agreeing a supply or distribution deal

It is useful because it gets the price, conditions and timing on paper early. If the two sides do not agree on those, it is better to find out before anyone pays for a full contract.

Heads of agreement, term sheet or MOU: is there a difference?

In business, the three names are often used for the same kind of pre-contract document. What matters is not the title but what the words inside say. The Australian Government’s own Department of Finance glossary describes an MOU as a written agreement that defines a working relationship, expectations and responsibilities, and says MOUs are usually not legally binding. That glossary is about arrangements between Commonwealth bodies, so do not rely on the label alone to decide what binds in a private deal.

Is a heads of agreement binding?

It can be, and it can be not. The Victorian Government Solicitor’s Office says whether one is binding depends on the circumstances and in particular the objective intention of the parties, applying the principles in the case Masters v Cameron. It points to a Victorian Supreme Court case where the parties were held not to be bound, based in part on the written terms of the document. Working this out looks at the terms in the document and the conduct leading up to signing.

That is why the binding clause is the most important part of the drafting. A common way to draft it is to split the document in two:

• Non-binding parts: the commercial deal itself (price, structure, payment, conditions, timing). These record what the parties intend, subject to signing the full contract.
• Binding parts: the promises that need to work straight away, even if the deal falls over. In the Claim Done draft these are confidentiality, exclusivity (if you choose it), each side paying its own costs, governing law, dispute resolution and the binding clause itself.

Which parts bind is a choice the parties make in the wording. It is not automatic. If the deal is large, or you want the whole document to bind, get advice before you sign. The same office says it can be prudent to get a legal opinion confirming the document reflects your intention on whether it is binding.

What a heads of agreement usually records

Keep it to the points that make or break the deal. The table shows what each part covers.

If you are buying a business, business.gov.au says to gather information before you sign the contract, including financial records, business operations and legal documents, and to examine the past three to five years of financials. It also lists checking whether the landlord will agree to transfer the lease. A due diligence period in your heads of agreement gives you the time to do that.

The structure of the document

This is the shape of the heads of agreement Claim Done drafts. It is a framework, not a fill-in-the-blanks form.

1. Title and date. Heads of Agreement, and the date it is made.
2. Parties. Names, ABN or ACN where relevant, and addresses.
3. Background. Two or three lines on the deal being proposed.
4. Statement of intent. That the parties will negotiate in good faith towards a full, binding agreement on substantially these terms.
5. Key commercial terms. Numbered clauses for the deal structure, price, payment, conditions, timing and any other key terms.
6. Binding and non-binding terms. A clear list of the clauses that bind now. Everything else is marked as non-binding.
7. Exclusivity. The no-shop period, if you chose one.
8. Confidentiality. Both sides keep the terms private.
9. Due diligence. Access to records and the time allowed.
10. Expiry. The date the terms lapse if no full contract is signed. If you skip this question, the draft uses 90 days from the date of the document.
11. Costs, governing law and execution. Each side pays its own costs, the State or Territory whose law applies, and signature blocks for both parties.

Sending it and what to keep

Once you approve the draft, Claim Done can email it to the other party if you give their address. Both sides sign. Keep a signed copy with your notes of the negotiation. The business.gov.au guide to negotiating a contract suggests writing down what you talked about, what you agreed on and the date and time, and keeping those notes somewhere safe.

The next step: the full contract

A heads of agreement is not the end. When you buy a business, business.gov.au says that after you and the seller agree on a price, you need a contract to give legal force to your agreement, so that both sides clearly understand what each agrees to. The full contract carries the detail the heads of agreement leaves out: full warranties and indemnities, settlement mechanics and anything particular to the deal.

Use the lapse date as a deadline. The draft says the heads of agreement lapses if the full contract is not signed by that date, so both sides know when the offer stops standing.

Mistakes to avoid

• Leaving the binding question unclear. Say in plain words which clauses bind. Do not leave it for someone to argue about later.
• Putting in too much detail. The Victorian Government Solicitor’s Office notes that the more detail in a heads of agreement, the less flexibility there is to negotiate the final agreement.
• Agreeing to exclusivity with no end date. A no-shop period should be a set number of days.
• No lapse date. Without one, a stalled deal can hang over both sides.
• Signing a term you are unsure about. business.gov.au warns not to sign a part you are uncomfortable with hoping to sort it out later, and lists a business adviser, a Business Enterprise Centre or a lawyer as places to get help.

When the main terms are settled and you want them on paper before the full contract, start your heads of agreement now. It takes a few minutes, and the flat fee is A$49.